Wednesday, December 31, 2008

A two part post: WaMu’s Failure, Deloitte’s Failure, Market Failure: A Case Study

It all finally came crashing down on September 25, 2008. After one hundred-plus years of stable steady growth and expansion, ten years of aggressive acquisitions and record profits and one tumultuous year of disaster, the US Office of Thrift Supervision seized Washington Mutual Bank from its holding company after banking hours and placed it into Federal Deposit Insurance Corporation receivership. With rumors of its potential demise spreading, depositors withdrew $16.7 billion in 9 days , crippling the company’s liquidity and ability to act as a going concern. JPMorgan subsequently purchased the bank’s assets and deposits for $1.9 billion, less than a third of what was offered earlier in the year (in stock) and turned down by WaMu’s board . Washington Mutual’s collapse was the largest bank failure in U.S. history; when large banks fail many other stakeholders are affected, and many parties contributed to the problems that brought WaMu down. The class action complaint brought by Bernstein Litowitz Berger & Grossmann LLP on behalf of investors offers a tremendous array of insider testimony and inside information about WaMu’s operations during the period 2005-2008; it is of such high quality, breadth and scope that it will be the primary source for this analysis. Defendants include top WaMu executives, directors, underwriters of securities offerings, and Deloitte Touche Tohmatsu, a Big 4 accounting firm. Deloitte is accused of violating Section 11 of the Securities Act of 1934 by offering unqualified auditor’s reports attesting to the accuracy of financial statements incorporated into securities offerings made in 2006 and 2007. Deloitte failed WaMu, and WaMu failed the public. Direct investors in Wamu securities and related derivatives lost substantial sums, and have procedural avenues to claim relief from these losses, whatever their worth. The public has yet another high-profile auditing failure, loss of confidence in the market, and no directly effective remedy. It could be useful to examine the lessons from WaMu and Deloitte’s failure: the decisions that brought them to collapse, the warnings ignored, the laws broken, and what this bank failure says about the audit industry.

WaMu’s “Whoo Hoo” Mortgage Business

According to many former employees of WaMu, the culture and focus of the bank began to change in 2005 with the placement of a new senior management regime. Stephen Rotella joined WaMu as president and COO and acted as president of the Home Loans Group until David Schneider took the position in mid-2005. WaMu also appointed a new Chief Enterprise Risk Officer (Ronald Cathcart) and a new Controller (John Woods) at this time . After 2000 and especially after the transition in leadership in 2005 WaMu’s focus became residential lending and related products as a driver of asset accumulation and interest income. In 2006 and 2007 nearly 70% of interest income and 60% of overall average assets were generated by residential real estate loans either originated by WaMu and held or sold or loans and mortgage-backed securities purchased for investment . This was no accident; WaMu’s new management team had very clearly focused on aggressive tactics to capture market share in residential real estate, offering a new 5 year plan in February 2005 intent on “transforming the company's mortgage business and maintaining a leading national position in mortgage lending…” . WaMu focused sales efforts on subprime lending and nontraditional products such as interest-only, 80/20, Option ARM and adjustable-rate loans. Mortgage lending had undergone something of a sea change since the last downturn in housing ended in the early 1990s. After the dot-com bubble burst in 2000 low interest rates, stagnant real wages, population growth and rapid appreciation made housing an attractive investment sector for quick cash and equity gains. Expanded markets in securitizing and trading of loans meant that a bank like WaMu could be aggressive in originating loans and earning origination fees without having to hold them in-house and take the attendant risks; lenders could securitize the loans and sell them to third parties as quickly as they could procure them. Highly potentially profitable interest-only, teaser, and especially Option ARM loans overtook traditional fixed-rate mortgages in the WaMu portfolio; Option ARMs themselves represented over 50% of WaMu’s portfolio from Q3 2005- Q2 2008 . Option ARM loans allowed the borrower to make a “minimum” payment below the interest due; the difference would negatively amortize into the principal until “recasted” into a new payment structure after hitting a ceiling of 110-125% of origination amount. Some WaMu employees interviewed for the class action complaint described the residential mortgage operations as “crooked” and “underhanded” . According to numerous witnesses loan salespeople were often unqualified or uninterested in ensuring that borrowers understood the terms of their loans; Confidential Witness 5 believed that “the majority” of Option ARM borrowers did not understand that their rate and payments would go up after the teaser period (Complaint p. 38). Repeatedly in the complaint employees stated that policy dictated from the highest levels encourage aggressive selling, wholesale noncompliance with company underwriting standards, fictitious appraisals, and “tremendous pressure from the sales guys to approve loans” and that, with the involvement of WaMu management, even questionable loans “usually got taken care of one way or another.” (Complaint p. 36).

Underwriting and risk management standards were materially weakened or ignored with increasing fervor during the period beginning in 2005. Confidential Witness 17, a former Senior Vice President of Enterprise Risk Management, “explained that various Risk Reports were delivered to WaMu’s senior management – including at least Defendants Rotella, Cathcart and Casey – during 2006 ‘specifically quantified the fact that the Company was exceeding certain risk parameters as dictated by [WaMu’s] risk guidelines’” (Complaint p. 44). CW 17 said the methodology that was being used to analyze risk was inadequate and that pleas for corrective action “were overruled” (Complaint p. 44). CW 17 and other senior, experienced risk management leaders chose to leave the company during the class period rather than be parties to the policies being directed by top-level executives. A memo issued by the Chief Compliance and Risk Oversight Officer in October 2005 spelled out the new model, in case employees had failed to grasp it: from then forward Risk Management would be a “customer-service, supporting function” rather that imposing a “regulatory burden” on other Company segments (emphasis mine) (Complaint p. 45-46).

Sean Campbell

Part II.See the report on WAMU here in the Wall Street Journal.The 'Market' Isn't So Wise After All

This year saw the end of an illusion.By THOMAS FRANK

As I read the last tranche of disastrous news stories from this catastrophic year, I found myself thinking back to the old days when it all seemed to work, when everyone agreed what made an economy go and the stock market raced and the commentators and economists and politicians of the world stood as one under the boldly soaring banner of laissez-faire.

In particular, I remembered that quintessential work of market triumphalism, "The Lexus and the Olive Tree," by New York Times columnist Thomas Friedman. It was published in the glorious year 1999, and in those days, it seemed, every cliché was made of gold: the brokerage advertisements were pithy, the small investors were mighty, and the deregulated way was irresistibly becoming the global way.

In one anecdote, Mr. Friedman described a visit to India by a team from Moody's Investor Service, a company that carried the awesome task of determining "who is pursuing sound economics and who is not." This was shortly after India had tested its nuclear weapons, and the idea was that such a traditional bid for power counted for little in this globalized age; what mattered was making political choices of which the market approved, with organizations like Moody's sifting out the hearts of nations before its judgment seat. In the end, Moody's "downgraded India's economy," according to Mr. Friedman, because it disapproved of India's politics.

And who makes sure that Moody's and its competitors downgrade what deserves to be downgraded? In 1999 the obvious answer would have been: the market, with its fantastic self-regulating powers.

But something went wrong on the road to privatopia. If everything is for sale, why shouldn't the guardians put themselves on the block as well? Now we find that the profit motive, unleashed to work its magic within the credit-rating agencies, apparently exposed them to pressure from debt issuers and led them to give high ratings to the mortgage-backed securities that eventually blew the economy to pieces.

And so it has gone with many other shibboleths of the free-market consensus in this tragic year.

For example, it was only a short while ago that simply everyone knew deregulation to be the path to prosperity as well as the distilled essence of human freedom. Today, though, it seems this folly permitted a 100-year flood of fraud. Consider the Office of Thrift Supervision (OTS), the subject of a withering examination in the Washington Post last month. As part of what the Post called the "aggressively deregulatory stance" the OTS adopted toward the savings and loan industry in the years of George W. Bush, it slashed staff, rolled back enforcement, and came to regard the industry it was supposed to oversee as its "customers." Maybe it's only a coincidence that some of the biggest banks -- Washington Mutual and IndyMac -- ever to fail were regulated by that agency, but I doubt it.

Or consider the theory, once possible to proffer with a straight face, that lavishing princely bonuses and stock options on top management was a good idea since they drew executives' interests into happy alignment with those of the shareholders. Instead, CEOs were only too happy to gorge themselves and turn shareholders into bag holders. In the subprime mortgage industry, bankers handed out iffy loans like candy at a parade because such loans meant revenue and, hence, bonuses for executives in the here-and-now. The consequences would be borne down the line by the suckers who bought mortgage-backed securities. And, of course, by the shareholders.

At Washington Mutual, the bank that became most famous for open-handed lending, incentives lined the road to hell. According to the New York Times, realtors received fees from the bank for bringing in clients, mortgage brokers got "handsome commissions for selling the riskiest loans," and the CEO raked in $88 million from 2001 to 2007, before the outrageous risks of the scheme cratered the entire enterprise.

Today we stand at the end of a long historical stretch in which laissez-faire was glorified as gospel and the business community got almost its entire wish list granted by the state. To show its gratitude, the finance industry then stampeded us all over a cliff.

To be sure, some of the preachers of the old-time religion now admit the error of their ways. Especially remarkable is Alan Greenspan's confession of "shocked disbelief" on discovering how reality differed from holy writ.

But by and large the free-market medicine men seem determined to learn nothing from this awful year. Instead they repeat their incantations and retreat deeper into their dogma, generating endless schemes in which government is to blame, all sin originates with the Community Reinvestment Act, and the bailouts for which their own flock is desperately bleating can do nothing but harm.

And they wait for things to return to normal, without realizing that things already have.

First prediction for 2009: A widening gap between the public's view of the bailouts of Wall Street and Detroit, and the views of the direct beneficiaries. The public believes the bailouts will permanently change these industries, but industry insiders don't really want to change.

Exhibit one is Goldman Sach's CEO Lloyd Blankfein, who says the firm's business strategy doesn't need to change.

What? Goldman got $10 billion of taxpayer money precisely because it and other big banks were so over-leveraged they threatened the whole financial system. I can understand why Blankfein doesn’t want to change. He took home $54 million last year. (He has foregone a bonus this year and is taking home a piddling $600,000.) But the public expects real reform for its $10 billion at Goldman and tens of billions more in other major banks.

Blankfein isn't alone. I've heard the same thing from CEOs and directors all over the Street. They see the problem as cyclical, not structural. "The economy stinks," they tell me, "but it'll turn around in 18 months, and then we're back to the same business."

Or take the Big Three. They've agreed to become far more fuel efficient, as a condition for their bailout. But they promised this before -- during the oil crisis of the 1970s, when Congress threatened higher fuel-economy standards. But after the crisis passed, they never delivered. Why? Because their biggest profits were in gas guzzlers that consumers wanted to buy as soon as the first oil crisis was over.

Will history repeat itself? Now that gas prices are half what they were six months ago, consumers who can afford it are suddenly less interested in fuel efficiency. They're buying fewer hybrids and showing renewed interest in SUVs. So why should we think Detroit will revolutionize itself?

I'm not so cynical as to accuse anyone of bad faith. It's just that both Wall Street and Detroit earned big bucks from their old strategies, before the bottom fell out of the economy. So it’s natural they’d view the bailouts as ways to hold on until the economy rebounds. And it's clear they see their problem as cyclical, not structural.

Right now, Wall Street and Detroit are willing to say whatever they need to say to keep the taxpayer money coming. But when the economy begins turning up, my betting is that their Washington lobbyists will push back hard against any major restructurings the government wants to impose on them. New regulations of Wall Street will be watered down and circumvented; new requirements on the Big Three for green technologies will be resisted.

Yet the bailouts have been sold to the public as means toward fundamental change in finance and autos. If the bailouts are to do what they're supposed to – stop Wall Street from wild risk-taking with piles of borrowed money, and push the auto industry into making fundamentally new products that conserve energy -- Washington will not only have to set strict standards now and in the months ahead when the bailout money flows, but also hang tough when the economy begins to revive.

The emerging debate over Wall Street's and the Big Three's ongoing obligations to reform themselves is but one part of a much larger national debate we'll be entering upon in 2009 and beyond -- whether the economic crisis we're experiencing is basically cyclical (in which case, nothing really needs to change over the long term, after the economy gets back on track) or structural (in which case, many aspects of our economy and society will needs to change permanently). Robert Reich was Secretary of Labor in the Clinton Administration

This is an essay from the journal Democratic Left.The ideas provide a context for how we will need to work to change NCLB.

Part II: Mobilizing from Below to Enact an Economic Justice Agenda

The impressive depth and breadth of Obama’s electoral victory, combined with Democratic gains in both the House and the Senate, provides the possibility of reversing three decades of growing inequality that is the primary cause of an impending global depression. But these electoral gains will prove temporary if the Obama administration does not improve the living standards of middle and working class voters. To do so, the new administration will have to govern “big” and “quick.” While there is short-term consensus in favor of a major stimulus package, some of his centrist Democratic advisers are already warning that long-term spending plans will have to be put on hold, particularly universal health care and the increased taxes on the wealthy originally set to fund the program. And the moderate punditry, led by global-capitalist enthusiast Thomas Friedman, reminds Obama that “excessive regulation” of the financial industry could “strangle” the “entrepreneurial risk-taking spirit of capitalism.” We are in the midst of a global “liquidity crisis” in which banks will not lend capital out of fear that borrowers will not be able to pay them back. The mainstream media – and the Obama campaign and transition team – does not yet comprehend that this crisis has everything to do with the massive growth in inequality of the past three decades. The policies of deregulation, privatization, and de-unionization, supported by both Democratic and Republican administrations, led working and middle class Americans to try to maintain their living standards by taking on massive consumer debt and borrowing against their home equity. Once the housing bubble collapsed, so did their purchasing power. Only activist pressure from below can force an Obama administration to govern in a manner than could secure a Democratic realignment. With the constitutional system of checks and balances and separation of powers consciously aimed at forestalling rapid change, it is no surprise that almost all the reforms identified with the twentieth century Democratic Party – Social Security, the National Labor Relations Act, the Civil Rights Acts and Medicare – occurred in the period 1935-1938 and 1964-66, the only time when the Democrats controlled the presidency, had strong majorities in both chambers of Congress and insurgent social movements at their heels. If upon taking office the Obama administration boldly leads, his administration could pass major legislation for universal health care, massive investment in green technology, and labor law reform that would transform United States social relations for generations to come. But already the corporate community is mobilizing heavily against the Employee Free Choice Act. As a former community organizer Obama understands that reforms do not come from the top down; in the past, they arose because moderate elites made concessions to the movements of the unemployed and the CIO in the 1930s and to the civil rights, anti-war, women’s and welfare rights movements of the 1960s. But while the December sit-down at Republic Windows indicates that a new wave of labor militancy could be in the offing, the strength of the labor movement and the Left is even weaker than they were in 1932, when an economic crisis still demobilized workers fearing losing their jobs if they rocked the boat. Nor does there exist the degree of social mobilization within excluded communities of color parallel to the vigor of the civil rights movement of 1960.

]Specifics of a progressive agenda [ Thus, a “realigned” new Democratic majority can only be built if the Obama administration enacts a legislative agenda that reconstructs a new “productive” egalitarian economy. I emphasize “productive” because as this economic crisis should teach us, an economy whose major “wealth” is created by the shuffling of paper assets by ‘mega-banks,’ hedgefunds, and corporate law firms will inevitably be divided between a privileged top 10 or 20 percent of credentialed “symbolic manipulators” and a precarious middle and working class who “serve” them.. Only an economic system that invests in production for human needs – such as renewable energy, mass transit, and urban infrastructure, school and housing construction – can generate a sufficient number of “good jobs at good wages.” The infotainment, finance, and service model of “post-industrial” capitalism is vulnerable to continuous speculative bubbles because it does not produce sufficient real value to sustain mass middle-class living standards. And if the production of “useful goods” is increasingly off-shored, then United States living standards can only be sustained if the rest of the world will lend it the money to run massive trade deficits. If and when East Asian central banks decide that investment in Euros rather than U.S. Treasury bonds is a more secure way to preserve value, the entire United States model of indebted growth could collapse.. The dirty little secret is that aside from the auto industry, it is mostly military-related aerospace and military hardware production that sustains a high-wage manufacturing base in the United States. That base still produces 25 per cent of our GDP, while only employing 12 per cent of our workforce, whereas the financial industry has those figures reversed.. Such an imbalance between those who produce real value and those who shuffle paper value cannot sustain an egalitarian economic system. Republican intransigence and virulent anti-union sentiment is close to destroying our domestic auto industry.. Our domestic parts manufacturers alone employ 650,000 workers – or nearly triple the 230,000 remaining employees of the (once) Big Three— and sizeably in states outside of the Midwest. Should domestic parts suppliers go under with the Big Three, we could well lose several million industrial jobs forever. Even foreign transplants will switch to importing parts and supplies from foreign suppliers. Add in the Big Three auto dealers, who employ several hundred thousand workers, and the magnitude of the problem is clear. Our other major remaining industrial centers – aerospace and machine tools -- are heavily tied to military production. While this is a form of high-wage industrial production, it is heavily capital intensive and produces goods that have little “multiplier” effect Tanks and planes are not capital goods – they don’t produce more material goods; rather they either depreciate or are blown up!. Thus, the truth that no “strong on defense” Democrat speaks is that unless we transition our military production to industrial production for civilian use, we cannot create a new “productive” economy that creates a larger number of high-value-added productive jobs. Obviously, not all jobs can be outsourced. There are , and will remain, large numbers of people employed in the “infotainment” industry, health care, retail, construction, and the food and hospitality industry., and further unionization could raise the living standards of those employed in these largerly service sectors. But if the purchasers of care and leisure goods are going to be able to pay human wages to their service providers, then there must be enough industrial high-wage jobs to sustain those not working in the service sector. Only insurgent social movement activity will push the pragmatic Obama and his centrist, technocratic cabinet to govern “big.” While Obama’s web-based network of predominantly white and youthful middle-strata progressives could be activated in favor of “global warming” policies and major investment in green technology, they are unlikely to agitate for the industrial and social policies outlined above, which only mobilization by organized labor, new immigrant communities and excluded inner-city residents could engender. Obama’s victory raised hopes among these communities; but is there the organizational base within the labor movement, immigrant rights movement and inner city communities to mobilize quickly around an economic justice agenda? A sense of hope may lead the excluded to engage in more spontaneous acts of disruption that can scare elites into offering legislative change. (FDR’s pre-1935 reforms responded more to the homeless and unemployed movements of 1932-33 and the labor unrest in Toledo, Minneapolis, San Francisco and Seattle of 1934 than to the later emergence of the CIO.) Perhaps we will see urban militancy akin to that of the mid-1960s -- though the protests against police brutality that led to mass riots were led by working and middle class community activists who no longer reside in the largely impoverished urban ghettos. And whether mobilization of communities of color would provoke a similar politics of white racial backlash to those of 1966 onwards remains an open question.

]Stimulus plan needed now[Even before taking office the Obama administraiton confronts the most serious breakdown in the global economy since the Great Depression. Obama’s Treasury department and the Congressional Democratic leadership are likely to agree on a massive two-year stimulus package of at least $850 billion, but Republicans – perhaps joined by fiscally moderate Southern and Western Democrats – are likely to filibuster against such “massive deficit spending,” particularly if major public investment in alternative energy technologies is part of the package.. The Obama administration will have to remind the American public that Ronald Reagan ran deficits equal to 7 per cent of the GDP in each of 1981 and 82 (or the equivalent of $680 billion per year (!) in today’s dollars), in the face of a much less severe recession. In addition, the Obama administration must press Congress to implement a major anti-foreclosure program (similar to FDR’s Home Loan Corporation), as the income stream from homeowner payments on refinanced, affordable mortgages should significantly increase the value of the toxic assets of “securitized mortgages.” The Bush administration’s failure to protect the foreclosed (particularly those who could pay a reasonable renegotiated mortgage rate on a readjusted home value) explains in large measure its utter inability to improve the balance sheets of major financial institutions.The stimulus package should include major government funding of job-training in the inner cities (in green technologies, for example) and of opportunities for both GIs and displaced workers to return to university as full-time students (and for women on TANF to fulfill their ‘workfare’ requirements through secondary and higher education pursuits). While affluent suburbs provide their residents superb public education and public services, federal cutbacks in aid to states and municipalities has worsened the life opportunities of inner city residents. With all but seven states’ budgets in the red, cuts in social services and public-sector layoffs will devastate already hard-hit communities. . The inefficient and inequitable United States health care system cries out for replacement by a universal and cost-efficient alternative. If private insurance administrative and advertising costs of 25 per cent on the health care dollar could be reduced to Medicaid and Medicare’s three per cent administrative overhead, both universal and affordable coverage would be achieved.. Even securing “opt-out” provisions from the Obama’s ‘pay or play’ system of private insurance would be an improvement. Such ‘opt-outs’ would allow states to create their own single-payer systems, and enable Medicare or the federal employees health plan to market to employers as a lower-cost alternative to private group plans.]Looking at the revenue side[But how to pay for all this? The Obama administration should reverse not only the Bush tax cuts, but also the Reagan cuts in marginal rates on high-income earners, which would each return some $300 billion in revenues to the national treasury. In addition, abolishing the preferential 15 per cent tax rate on hedge fund and private equity managers’ earnings could garner another $100 billion in annual revenues. Truly ending the war in Iraq should save $100 billion per annum; a 1/3 cutback in United States military bases abroad and an end to Cold War era plans to build a next generation of fighters and an anti-ballistic missile defense could save $216 billion in federal revenue per year.The military budget is hideously oversized for a nation that claims armaments are necessary for defense, and not defense of empire. One fights terrorism by intelligence and espionage cooperation among states and via a multilateral diplomatic strategy that provides hope for the billions who still live under authoritarian governments and in extreme poverty. Obama’s call to send more United States troops to Afghanistan ignores the lessons of the Soviet experience: that foreign military presence only elevates the forces of Islamic fundamentalism into national resistance fighters.When the ponzi scheme of “securitized mortgages” collapsed with the end of the irrational run-up in housing prices, the federal government had to bail out Bear Stearns, then Fannie Mae and Freddie Mac, and then AIG. American capitalism has “privatized” gain, but “socialized” risk. Yet if risk is to be “socialized” then so should investments. The Obama administration should not only demand equity shares in the banks and corporations that are bailed out by the public treasury, but should also require that consumer, worker, and government representatives be added to the board of directors of corporations receiving government aid. And the administration must stick to the goal of re-regulating the finance industry so that it serves the interest of the productive economy and not those of run-amok speculators.A “new New Deal” would have to restructure international economic institutions so that they raise-up international labor, living, human rights, and environmental standards. In large part Obama owes his victory in the key battleground states of Ohio, Michigan, Indiana and Pennsylvania to the efforts of one of the few integrated institutions in the United States – the American labor movement. Restoring the right to organize unions (a right that no longer exists in practice in the United States) is a key policy component in the battle against economic inequality. Given the massive corporate and media offensive already launched against the Employee Free Choice Act, Obama will have to place the entire prestige of his presidency behind the legislation. He must use the bully pulpit to explain to the American public that NLRB elections are not “free” – not when the time lag between petitioning and the election works in managements’ favor, allowing management to intimidate workers, require them to attend anti-union meetings and leaves management free to fire pro-union workers with impunity. ]What’s next for the democratic Left?[An Obama presidential victory by no means guarantees the bold policy initiatives necessary to restore equity with growth to the United States economy. His campaign did not advocate major defense cuts, progressive tax reform, and significant expansion of public provision. But FDR did not campaign on bold solutions in 1932. It was pressure from below that forced FDR’s hand. Similarly, Obama’s victory may provide space for social movements to agitate in favor of economic justice and a democratic foreign policy. Let us hope that as a president who understands the process of social change, Obama will realize that those demanding the most from his administration are those who can best help him succeed in office. Obama, a supreme pragmatist , will respond to the balance of social forces that press upon his administration, or ignore them in the absense of pressure. Thus, the work of DSA, YDS and the rest of the democratic Left has just begun. We must join with our allies in the labor movement, communities of color, the feminist, and gay and lesbian and immigrants rights groups to advance the transformative social and economic policies outlined above and in DSA’s Economic Justice Agenda (see www.dsausa.org) . And we should begin to gear up to defend progressive House and Senate gains made in the 2006 and 2008 elections and replace Republicans and conservative Democratic officials at every level of government. To do this, DSA and YDS must not only build more capacity on the ground, but also build working relations with such groups as Progressive Democrats of America as well as trade unions and communityorganizations active in progressive electoral politics. What will be the unique “value-added” of DSA and YDS in these broad coalition efforts to press the Obama administration from the left? As all crucial economic justice reforms – universal national health care, EFCA,public investment in green technology and inner city infrastructure – involve state action to limit the prerogatives of corporate capital, the right will charge these reforms as being “socialist.” DSA’s role is to educate the American public as to the historic role of socialist-inspired reforms in rendering capitalist societies less capitalist and more democratic. Until more average Americans say “what’s wrong with socialism” even a less exceptional and more humane American mixed economy will remain a utopian dream.

Joseph M. Schwartz , a national vice chair of Democratic Socialists of America, teaches politics at Temple University. His most recent book is The Future of Democratic Equality: Rebuilding Social Solidarity in a Fragmented America (Routledge, 2008). Parts of this article is revised from “Memo to Obama,” which will appear in the January-February issue of Tikkun magazine.

Monday, December 29, 2008

The Obama transition team has set up a process for asking questions, and a process for deciding which questions are most urgent.

We recently launched a new feature on Change.gov called Open for Questions. Thousands of you responded, asking 10,000 questions and voting nearly a million times on questions from others.

Now that we've answered some of the most popular ones from the last round, we are open for questions again. Ask whatever you like, and vote up or down on the other questions to let us know which ones you most want the Transition to answer.

Get started now at http://change.gov/openforquestions. I encourage readers to ask questions and to read others' questions.

Monday, December 22, 2008

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits in the calendar year 2007, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for 53 of the 116 banks that have so far accepted tax dollars to boost their bottom lines.

Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe "to get them to do the jobs for which they are well paid in the first place.

"Most of us sign on to do jobs and we do them best we can," said Frank, a Massachusetts Democrat. "We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!"

The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:

_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.

Story continues below _Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.

This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday declined to comment beyond that written report.

The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.

_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.

_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.

Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.

The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.

The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.

Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.

At Bank of New York Mellon Corp., chief executive Robert P. Kelly's stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Goldman Sachs' tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.

JPMorgan Chase chairman James Dimon ran up a $211,182 private jet travel tab last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.

Banks cite security to justify personal use of company aircraft for some executives. But Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation's security-conscious commercial air terminals.

Sherman, a member of the House Financial Services Committee, said pay excesses undermine development of good bank economic policies and promote an escalating pay spiral among competing financial institutions _ something particularly hard to take when banks then ask for rescue money.

He wants them to come before Congress, like the automakers did, and spell out their spending plans for bailout funds.

"The tougher we are on the executives that come to Washington, the fewer will come for a bailout," he said.

Friday, December 19, 2008

Rebuild America. Rebuild our State Universities & Colleges. A New Deal in the New Millennium for Higher Education Resolution adopted by the California Faculty Delegates Assembly, October 19, 2008 A paradigm shift is sweeping the world. The historic financial crisis has created a broad new openness, not seen for 25 years, to the idea that public institutions are a social good and government should play a significant role in maintaining economic stability. Yet, while Congress has infused massive amounts of American’s tax dollars in an attempt to staunch the financial bleeding on Wall Street, it is not clear what commitment will be made to rebuild our human infrastructure – to bail out the people of the United States. We do know that broad access to quality higher education is a key ingredient to a positive outcome for the American people. Educators and business leaders agree that the very survival of a strong U.S. economy requires a highly educated work force. Affordable, accessible, quality education is good for an individual’s personal finance, but more importantly, it is good and essential for our society’s prosperity. For years, the California Faculty Association has asserted, argued and demanded attention to and proper funding for quality public higher education that is accessible and affordable for every Californian, particularly in the California State University. Yet for nearly two decades we have witnessed the persistent erosion of public support for our state universities and colleges across the nation. In California, our state has cheated our students by surreptitiously and gradually leaching away funding per student over the years. Any hope of relief was undermined by enormous cuts in 2002 and 2003, totaling more than a half billion dollars in the CSU alone. We call on our elected leaders, nationally and here in California, to fundamentally change their thinking about the role and funding of public higher education. It is unacceptable to praise the university on the one hand while destroying it with the other; now we must reverse course and rebuild. Today, we must think of the California State University, and all our nation’s public colleges and universities, as solutions to a downward economic spiral. Here in the CSU, just since October 1, there has been a 21% increase in applicants for the Fall 2009 school year. It is well documented that in periods of high unemployment, more people seek retraining and more people rely on public universities. We need to invest in public higher education today so that we don’t need to rescue millions of young people in the future. The bail out of the banks in such a bold and massive way has revealed that we can afford to take dramatic action when we have the will to do so. A New Deal for a New Millennium that invests significant resources of similar size into public higher education likewise could have a dramatic effect – if we can muster the will. Consider this:  $70 billion, just one-tenth of the amount of the Wall Street bailout, would nearly double the total state funding allocated to higher education in the United States in 20071.  $700 billion is more than ten times the size of the federal Dept. of Education Budget for 2007.2  $700 billion would cover $20,000 in tuition and expenses in each of four years in school for 8.7 million California State University students. $700 billion would provide an additional $318,000 to spend on each of the 2.2 million students enrolled in the public community colleges and universities in California last year.  $700 billion could send 5.4 million students to a public university somewhere in the United States this year.3  For every $1 invested in the California State University, $4.41 is returned to our state economy. The CSU contributes $7 billion to California’s economy – revenue we cannot afford to part with given the deep deficit we already face.4 A crisis of this magnitude calls for bold action. That is why we call on our nation’s leaders to:  Initiate a “New Deal in the New Millennium for Higher Education” to get our people into college and to keep them there all the way to a degree. We propose a federal program for higher education in the amount of $70 billion -- just 10 percent of what our nation is spending on Wall Street and the banks.  Establish college-going grants similar to the World War II G.I. Bill, and student loan debt forgiveness for all students who take jobs in public service. Public financial aid should be provided to rescue our students from the hands of private financial institutions. We also call on California’s lawmakers and higher education policy makers to:  Join us in our call for a “New Deal in a New Millennium for Higher Education” that will enable us to rebuild the California State University and the other segments of our state’s public higher education system.  Restore the $215 million cut from the CSU budget in the 2008/09 state budget. And work to add funding above the minimal levels established in Gov. Schwarzenegger’s funding promises in future years. A real commitment will yield real results for California and the nation.  Reopen the doors to the 10,000 students who were turned away this year due to budget cuts. New graduates and unemployed adults alike need opportunity to become tax paying participants in California.  Roll back tuition and fees to 2002 levels before the intensive period of fees increases began that now total 113%. We can’t afford to block students from getting an education because they can’t afford to pay. Furthermore, we call on our colleagues in universities and colleges across the nation to  Join with us in working for and inaugurating this “New Deal in a New Millennium” to rebuild public higher education in America. ###

REFERENCES 1 Grapevine, “An annual compilation of data on state tax appropriations for the general operation of higher education,” www.grapevine.ilstu.edu 2 US Department of Education, www.ed.gov 3 Columbia Journalism Review, “What Can You Buy for $700 Billion?” 9/23/08, www.cjr.org 4 ICF Consulting, “Working for California: The Impact of the California State University,” 2005.

Wednesday, December 17, 2008

From the Chicago Catalyst.Duncan's track recordby Sarah Karp and John MyersDecember 15, 2008

In his seven years as CEO of Chicago Public Schools, Arne Duncan has taken on a host of urban education policy challenges to varying degrees of success.

This week, Catalyst revisits some of these signature initiatives, and weighs their significance on the national scene.

Today, we look at the efforts of the Secretary of Education designate to transform high schools, offer families more and better school choices and raise the performance bar for teachers, principals and administrators.

Reforming high schools

Duncan’s oft-stated goal was to create the “best urban school district in the nation.” Yet here, as elsewhere, high schools have made little progress.

Overall high school graduation rates improved under Duncan (up to 55 percent from 47 percent), as did college-going rates (up to 50 percent from 44 percent).

Also improved is the district’s accountability around making sure students go to college. Duncan created the Office of Post-secondary Education and charged it with tracking students after they graduate. CPS is one of the few urban districts that partners with the National Student Clearinghouse, a data warehouse, so it can keep tabs on its graduates. And this past year, Duncan personally pushed principals to get more students to fill out financial aid eligibility forms.

But even with these modest improvements, fewer than a third of the students who were freshmen in 2003 and graduated four years later enrolled in college.

Individual schools, particularly neighborhood high schools like Marshall in the impoverished West Garfield Park community, have not done much better under Duncan’s leadership. Marshall’s graduation rate, for instance, is 40 percent, up only four points; and its college-going rate actually declined 4 points to 31 percent.

Meanwhile, districtwide high school test scores remain stagnant—only 31 percent of juniors meet state standards—leading many to question whether CPS graduates can succeed in college or in the job market. All but two of the 10 lowest performing high schools in 2001 lost ground by 2008.

Duncan has used three strategies to fix high schools: Close them down and replace them with new, smaller schools (Renaissance 2010); fire school staff and reopen under new management (turnaround strategy); or infuse classrooms with new curriculum and materials (High School Transformation). On all fronts, long-languishing, often-ignored high schools got some much needed attention. Also, education experts laud the focus that these efforts have placed on what goes on in the classroom.

But problems with high schools are so entrenched and intertwined with poverty that it is difficult to predict whether these efforts will be enough.

High School Transformation, for instance, launched in 2005 with the promise of delivering carefully chosen curricula designed to engage low-income students, and the teacher training to go with it. Currently, 50 schools are participating at a cost of $80 million. The influx of equipment, such as laptops and science lab materials, has been especially welcome in resource-starved schools.

But the implementation has been rocky. Earlier this year, Catalyst reported that hundreds of students in the city’s worst high schools showed up weeks after the school year had begun. On average, students in these schools were absent 50 days or more. Teachers wound up spending weeks doing catch up and back tracking. Meanwhile, this problem has received little attention in recent years, and the one tool schools need to combat it—truancy officers—are long gone. [See High School Transformation]

Duncan concedes High School Transformation has its limits. To fill some of the gaps, he has created programs to keep freshmen on track academically, and to support small groups of students most at-risk of dropping out.

For individual students, these kinds of supports show promise. The question is: Can Duncan bring them to scale, especially nationally?

Also see: http://www.truthout.org/121708R

Obama's Betrayal of Public Education?Arne Duncan and the Corporate Model of Schooling

MOST STATES ARE CUTTING EDUCATIONBy Nicholas Johnson, Elizabeth Hudgins, and Jeremy KoulishCenter on Budget and Policy Priorities

Twenty-seven states have cut education because they face massive, devastating budget deficits in this recession.

The combination of rising unemployment, declining consumer spending, declining asset values, and foreclosures has led to declining state revenues. And the number of people in poverty is growing, adding costs to state budgets for programs such as Medicaid and social services.

Education is by far the largest component of state budgets. Some 46 percent of all state general fund expenditures is devoted to elementary, secondary, and higher education.

Nearly all states are required to balance their general fund budgets. When large budget deficits develop, education often is cut deeply.

The following details cuts in education funding and programs states have made as they enacted their fiscal year 2009 budgets and additional cuts as they faced mid-year deficits. In addition, while most governors’ budgets for fiscal year 2010 have not yet been released, there already are some education cuts on the table for next year.

As the fiscal year 2010 budgets are released in January and February, it is highly likely that additional states will propose cuts in education and that the cuts will deepen significantly.

K-12 Education and Other Childhood Education Programs

At least 18 states have implemented cuts to K-12 education. At least one state is proposing such cuts.

Florida has cut aid to local school districts for the current year by $130 per pupil. Georgia has cut aid to local school districts for the current year by $99 per pupil. South Carolina has cut per-pupil funding by $95 in the current year and is in the process of making additional reductions. Maine has cut K-12 funding about $140 per pupil; this comes on top of education cuts earlier this year that were targeted to reduce specific programs.Massachusetts enacted cuts to Head Start, universal pre-kindergarten programs, and early intervention services to help special needs children develop appropriately and be ready for school. Funding for K-12 education has also been reduced, including spending for mentoring, teacher training, reimbursements for special education residential schools, services for disabled students, and programs for gifted and talented students.Maryland cut funding for a school breakfast pilot program, professional development for principals and educators, health clinics, gifted and talented summer centers, and math and science initiatives.In Nevada, the governor has ordered various cuts to K-12 education, including delaying an all-day kindergarten expansion, cutting per pupil expenditures in a pilot program by $400, eliminating funds for gifted and talented programs, eliminating funds for a magnet program for students who are deaf or hard of hearing, and making across-the-board cuts. Additionally, young children with developmental delays will lose more than 15,000 hours of needed services.California’s budget reduces basic K-12 education aid to local school districts. It also cuts a variety of other programs, such as adult literacy instruction.Rhode Island has frozen state aid for K-12 education at last year’s levels in nominal terms and reduced the number of children who can be served by Head Start and similar services by more than 550.State education funding has also been cut in Alabama, Connecticut, Delaware, Kentucky, Ohio, Utah, Virginia, and Washington. Kansas has been delaying payments to school districts.In the recently released New York budget for fiscal year 2010, the governor proposes nearly $2 billion in cuts in education funding. Reductions in aid to individual school districts would range between 3 percent and 13 percent. In addition, a number of specific programs are eliminated, including supplemental math/science programs and new-teacher mentoring programs.

Colleges and Universities

At least 24 states have implemented cuts to public colleges and universities and/or are implementing large increases in college tuition to make up for insufficient state funding.

When the state of Rhode Island cut higher education funding last year, the University of Rhode Island, Rhode Island College, and the Community College of Rhode Island all increased tuition for the current academic year. Each of these institutions now has gone one step further by increasing tuition further mid-year, by 6.7 percent, 8.2 percent, and 14.3 percent respectively.In Florida, university budgets and community-college funding have been cut. The University of Florida has announced it will eliminate 430 faculty and staff positions and decrease funding for disability services, financial aid services, and internship opportunities. Student enrollment is declining by more than 1,000 at both Florida State University and the University of Florida. The legislature has approved a statewide tuition increase of 6 percent; the University of Florida is increasing tuition for in-state under-graduates by 15 percent.Arizona State University plans to address its loss of state funds by holding vacant or laying off 150 to 200 faculty associates, boosting class size, and reducing enrollment in its nursing school by 5 percent to 10 percent.In Kentucky, state budget cuts to colleges and universities of about 3 percent have led to in-state tuition hikes of 5.2 percent at the Kentucky Community and Technical College System. The Council on Postsecondary Education has also approved in-state tuition increases for universities across the state from 6.1 percent (Murray State University) to 9 percent (University of Kentucky and University of Louisville). Additionally, the University of Kentucky has announced 188 faculty and staff positions will be eliminated.Following cuts to state university budgets, tuition increases have been announced in Alabama (13 percent), New Jersey (4 percent to 9 percent), Maine (10 percent), Oklahoma (9 percent to 10 percent), South Carolina (6 percent), Tennessee (6 percent), and Virginia (average increase of 7.3 percent when fees are included). California is raising in-state tuition by 7.4 percent to 10 percent as part of its October budget deal, and in November the governor called for an additional 10 percent cut to universities. In New York, resident undergraduate university tuition is rising 14 percent to 15 percent; funding for community colleges is proposed to be cut but the impact on tuition is not year clear.Other states making cuts in higher education operating funding include Connecticut, Georgia, Idaho, Maryland, Massachusetts, Minnesota, Nevada, Pennsylvania, Utah, Vermont, and Washington. Large tuition increases are likely in some or most of these states.

Relying on more borrowing, California Republican leaders have announced a state budget plan that fails to include the revenues necessary to address the funding crisis facing California California's students and schools. The GOP plan would cut more than $10 billion from schools and community colleges – undermining the future for an entire generation of students.

Email your legislators today . Tell them to reject the Republican budget plan and to support additional revenues to prevent deeper cuts to our public schools.

Read more about the state budget crisis and how it impacts your school district.

CTA and the Education Coalition unveiled “Holiday Wish Lists” for local schools in the midst of the devastating budget cuts. Events were held this week in San Francisco Francisco, Chico and Fresno Fresno.

Tuesday, December 16, 2008

After more than a month of speculation and debate, President-elect Barack Obama finally announced that Arne Duncan will be Secretary of Education in his administration.

Duncan, CEO of Chicago Public Schools (CPS) since 2001, has never been a teacher, but has been deeply involved with education for many years, beginning when he was playing professional basketball in Australia and working with children who were wards of the state. Once returning from Australia, the Harvard graduate became director of the Ariel Education Initiative before joining CPS in 1998.

Duncan has earned a reputation as a reformer who backed paying students for grades, charter schools, and he supported a failed proposal for a gay-and lesbian-centered high school. Despite angering some people with his reforms, Duncan has managed to get nothing but praise from teachers' unions for working with them instead of engaging in constant battles.

Obama faced a tough choice in appeasing the more traditional unions and the reform-minded generation of educators, and Duncan seems to be a good fit to placate both sides. He's a progressive who pushes for reform, but he also works closely with the unions and their allies.ASCD. Association for Supervision and Curriculum Development

An Opinion:For all of Obama's touting of governmental change, his selection of the Secretary of Education disappointingly is more of Chicago-style "business as usual." During Duncan's tenure with Chicago Schools, there has been little real systemic change - just a continuation of the top-down, test-them-till-they-drop-in-the-guise-of-accountability that George Bush's administration rammed down school district's throats. Real systemic change cannot occur without the voice and ownership of those expected to implement the change. Duncan doesn't get that and it would appear Obama doesn't either. Sadly, teachers will continue to be the whipping boy for society's ills and students will continue to be political pawns instead of valued citizens of and contributors to this country.Priscilla Gutierrez

See the comments here: http://www.huffingtonpost.com/2008/12/16/ifreakonomicsi-levitt-pra_n_151404.html

Monday, December 15, 2008

Strengthening Progressive State Power Should Be Priority for D.C. LeadersMonday, November 18, 2008Increasing-Democracy

BY Nathan NewmanStrengthening Progressive State Power Should Be Priority for D.C. Leaders

With conservatives losing the presidency and democrats controlling congress, we are likely to see a significant redeployment of conservative political energy into the states. There are still 33 state governments where Republicans control either a governorship or a legislative chamber, and other state political bodies are still controlled by conservative Democrats.

We are already seeing rightwing forces shift to state level policy campaigns. In fact, multiple conservative commentators have begun to openly discuss that the states will be their key target in the next few years. William Kristol, editor of The Weekly Standard and considered one of the key intellectual leaders of the neoconservatives, recently wrote that conservative resurgence will start in the states: any "comeback will surely be successful practical governance at the state level." Peggy Noonan, a speechwriter for the first President Bush, wrote in the Wall Street Journal that "I believe renewal and reform will come from the states" and "the new emerging Republicans are likely to come in the end from the states."

One example of this renewed focus on local politics is the recently launched " American Solutions" organization, started by Newt Gingrich. The organization's goal is to mobilize the "513,000 elected officials in America, from school board to city council to county commission to state legislature." Gingrich is in many ways returning to his original path in rising to power as Speaker of the House of Representatives, which began with his leadership of GOPAC - an organization dedicated to training state leaders and winning control of state governments - and successfully fueled rightwing power across the country.

With the recent loss of federal power, we will no doubt see conservative leaders at the state level launching local attacks on immigration, gay rights and other issues as a wedge to win local power and to undermine support for federal progressive policy in the media.

Progressive leaders nationally and locally need to take this conservative focus on local politics seriously. Progressives need to be proactive and build a "collaborative federalism" that reinforces progressive policy not just in D.C. but in statehouses across the nation. This Dispatch details why state policy will remain central to national policy debates, how New Deal and Great Society progressive leaders made strengthening progressive power in the states a central focus of their work, and what a progressive collaborative federalism policy would entail for the incoming President and Congress.

States Will Remain Central to Policy in New Era

As we described last year in our Why States Matter Dispatch, most pundits and analysts underestimate the dominant role states have played and continue to play in much of domestic policy.

States' Dominance of Domestic Spending: In total, states spend over $2 trillion each year on a range of programs - almost three times the dollar amount of non-social security domestic programs administered at the federal level (see chart to the left). Critical programs like Medicaid, worker's compensation, public schools, unemployment insurance, most of our criminal justice system, and most aid to the poor are administered not from D.C. but in the states. For example, Indiana, Michigan, New York, Ohio and South Carolina have insolvent unemployment insurance funds and will have to borrow money from the federal government because due to increased unemployment numbers, more money is going out than is coming in from business taxes.

The public employees who actually do government work day-to-day, such as school teachers, cops and program case workers, are overwhelmingly employed at the state and local level. State and local governments employ 18.6 million people - over nine times as many as the federal government - which employs just over two million public employees.

Regulatory Power at the State Level: As we described in our 2006 report, Governing the Nation from the Statehouses, conservative leaders have long understood that even without control in Washington, D.C., states have key regulatory power over the economy and society beyond their budgets and spending power:Contracts and Corporate Accountability: Through state law and liability rules, the states regulate trillions of dollars of commerce in the economy. State courts reported 17 million civil cases in 2003, including contract, tort and real property disputes.Criminal Justice: While there were 170,535 federal prisoners in 2004, this is dwarfed by the 1.9 million prisoners in state and local prisons and jails.Public Pension Funds: While D.C. is debating whether to take equity stakes in private companies, state public pension funds control well over $2 trillion in financial assets.Employment Rights: While the media focus remains on the application of federal civil rights or labor laws, these only protect employment relative to a baseline of job protections determined by state law. Conservatives understand the power that states wield and progressives, especially those in D.C., need to take it seriously as they formulate policy.

Strengthening Progressive Power in the States Central to New Deal and Great Society Goals

In some cases, as described in our 2006 Governing the Nation from the Statehouses report, state regulatory power has been used for rightwing purposes, while in others it has strengthened long-term progressive goals. As progressives in D.C. assess their priorities, they should recognize that one of their longest enduring legacies would be to strengthen progressive power in the states, a legacy that will last if or when progressive dominance at the federal level might yield in the future to conservative opposition.

New Deal and Great Society Strengthened Collaborative Federalism: Despite some conservative myth-making, the period before the New Deal was not some heyday of "state rights" and decentralized power in America. In fact, the federal courts rather ruthlessly struck down state law after state law as overridden by federal power under the Constitution or by existing federal statutes.

David Walker in his book The Rebirth of Federalism describes how under the New Deal, instead of perpetual conflict between federal and state powers, the nation saw the rise of a cooperative federalism where federal and state governments shared many responsibilities in a collaborative system. The New Deal Supreme Court not only expanded regulatory authority for the federal government, it specifically empowered states to act in areas like the minimum wage and child labor, and was far more willing to allow states to regulate in areas where the federal government was also taking action. Additionally, despite an increased proportion of spending by the federal government, the majority of domestic spending remained at the state and local level. And as highlighted above, much of this increased federal spending was devoted to direct aid to the states, deepening the collaborative nature of spending in more and more functions of government.

Even as New Deal strength ebbed in the 1950s, this increased power exercised in the states allowed new progressive coalitions to emerge in multiple states, enacting civil rights laws, electoral reforms and other progressive policies that would presage the rise of the Great Society in the 1960s.

In turn, a large focus of the Great Society was on strengthening the tools for progressive governance in the states. Grant-in-aid programs from D.C. to the states increased 68% in real dollars between 1964 and 1968, with a fairer distribution of dollars that reflected the population of each region receiving aid. On the legal front, civil rights laws and the "one person, one vote" decision expanded grassroots democratic power and strengthened progressive mobilization in states across the country.

By the 1970s, reformed state governments were increasingly seen as drivers of innovation in policy, with progressive consumer, environmental and workers' rights movements flourishing at the state level even after the Reagan era began. While federal commitments to social justice would recede with Reagan's election, states could still take advantage of ongoing federal grant programs embodied in Great Society policies such as Medicaid to promote progressive innovation at the state level.

Battles Over State Policy Critical in Shaping Progressive Comeback Nationally

It is worth considering that the present national comeback of progressives in D.C. was built on successful state campaigns made possible by the legacy of past progressive eras that strengthened the power of progressives at the state level:State campaigns for the minimum wage became a key arena for progressives to emphasize fair wages as a "values" issue that can rally supporters. The rise in the federal minimum wage rate was driven by state after state leading the way in raising their own minimum wage. And even when the federal rate rises to $7.25 per hour next year, eleven states plus the District of Columbia, covering 26% of the U.S. population, will still have a minimum wage rate higher than the federal level.Similarly, universal health care was put back on the national agenda after demonstrated state-level successes, such as the Illinois AllKids program to provide health coverage to all children and debates on more comprehensive coverage programs in states from Massachusetts to the proposed Healthy Wisconsin initiative.And while federal legislators were gridlocked on debates over climate change, states in New England have already started a "cap-and-trade" auction to limit climate change emissions with other state regions beginning to join them. These examples all served to contrast the potency of progressive problem-solving versus conservative federal inaction on critical issues as we approached the 2008 election. While there is now great hope for escaping the perpetual political gridlock at the federal level, the states will continue to serve as incubators of new policies and a check on future inaction at the national level long into the future.

Danger of federal preemption: Despite their "states' rights" rhetoric, conservatives at the federal level have increasingly recognized this emerging progressive power in the states and have sought to limit or flat-out block state authority to protect consumers, workers or the environment at the state level. A 2006 Congressional report found that the U.S. House and Senate voted 57 times in the previous five years to preempt state laws, limiting state action on air pollution, contaminated food and Internet "spam."

Even without new federal laws, industries have used executive branch regulations to strike down state consumer protections. As we detailed in 2007, the effects of such federal preemption can be profound. As predatory lending expanded across the country, states sought to enact laws to limit such abusive subprime mortgage practices, only to see many of those laws blocked by federal courts based on Bush administration claims they were preempted by federal law. Preemption arguably cost the U.S. economy the trillions of dollars lost in a subprime meltdown that might have been prevented if states had been allowed to lead on a crisis they recognized far earlier than federal officials.

Reversing this rising tide of preemption of state policy should be a priority for incoming federal officials.

What the Feds Can Do to Strengthen Collaborative Federalism

State leaders and advocates need to reinforce the message that any new era of progressive governance in America needs to focus not just on immediate solutions to problems we face, however crucial they are, but also on strengthening the power of communities and states to solve problems in the future in a progressive manner. Elements of such a federal program would include: A revitalization of revenue sharing, including a stimulus funding critical state initiatives: With states reeling from lost revenue due to the escalating recession, it is critical for federal officials to recognize the key role of states in funding essential programs, from education to transportation to health care to public safety, and that a key progressive federal goal must be bolstering the revenue of states. Any immediate stimulus will fail if expanded federal funding is just counterbalanced by spending cuts at the state level, so aid to the states should be part of a balanced economic rescue package. Beyond that, the federal government should systematically restore federal revenue sharing in order to bolster funding for priorities shared by all states, allowing consistent federal revenues to complement local revenue sources that wax and wane based on local economic conditions. Additional federal revenue sharing is especially critical in addressing the problem of unfunded federal mandates.Structuring federal policies to promote innovation at the state and local level: Health care, education, public safety, labor rights, consumer protection, civil rights and a host of other programs inherently involve collaboration between officials and institutions at both the federal and state level. We need to move away from the situation we saw when states were trying to expand health care coverage for children and their parents under the framework of the SCHIP program only to see federal policy limit both funding and flexibility of states in implementing policy. Instead, new federal legislation and regulations should be informed by what has worked in the states and strengthen the ability of state and local governments to innovate in achieving new policy goals promoted at the federal level. Progressive federal policy should ideally provide both adequate funding and a level playing field of regulation within which states and municipalities can customize implementation to serve the particular needs of their communities.Limiting preemption of state and local policy: One critical change progressives should make at the federal level is an end to the increasingly routine preemption of state and local policy. Congress has passed dozens of laws this past decade which have restricted the ability of state governments to protect consumer safety, defend labor rights, or stop corporate abuses. This is on top of President Bush and increasingly conservative courts reinterpreting previously enacted laws to shut down progressive state policies, most notably the gutting of predatory lending laws that protect against abuses in the mortgage industry. Progressive federal leaders should commit to promoting federal policy that acts as a floor for regulation, while allowing states and local governments to provide additional consumer, health, environmental and labor protections on behalf of working families. Both the president and congress should explicitly limit preemption to cases where state and local laws conflict with federal law, not just to where states have enacted policy in an area related to federal policy.This new collaborative federalism compact needs to involve more systematic consultation with state leaders and locally-based organizations on federal legislation affecting state and local powers. Especially in a time when we need all institutions working together to revive the national economy, creating a new collaborative federalism needs to be a priority to sustain any new progressive era.

Resources

William Kristol, Weekly Standard - "Beyond Doom & Gloom: On the governors, Sarah Palin, and challenges ahead"Progressive States Network - Governing the Nation from the StatehousesProgressive States Network - Why States Matter David Walker - The Rebirth of Federalism Progressive States Network - Predatory Lending Bubble: How the Feds Preempted State Law U.S. House, Minority Staff of Government Reform Committee - " Congressional Preemption of State Laws and Regulations"

WASHINGTON — As the financial crisis jolted the nation in September, Senator Charles E. Schumer was consumed. He traded telephone calls with bankers, then became one of the first officials to promote a Wall Street bailout. He spent hours in closed-door briefings and a weekend helping Congressional leaders nail down details of the $700 billion rescue package.

The next day, Mr. Schumer appeared at a breakfast fund-raiser in Midtown Manhattan for Senate Democrats. Addressing Henry R. Kravis, the buyout billionaire, and about 20 other finance industry executives, he warned that a bailout would be a hard sell on Capitol Hill. Then he offered some reassurance: The businessmen could count on the Democrats to help steer the nation through the financial turmoil.

“We are not going to be a bunch of crazy, anti-business liberals,” one executive said, summarizing Mr. Schumer’s remarks. “We are going to be effective, moderate advocates for sound economic policies, good responsible stewards you can trust.”

The message clearly resonated. The next week, executives at firms represented at the breakfast sent in more than $135,000 in campaign donations.

Thursday, December 11, 2008

If we taught babies to talk as most skills are taught in school, they would memorize lists of sounds in a predetermined order and practice them alone in a closet. -- Linda Darling-Hammond

Progressives are in short supply on the president-elect's list of cabinet nominees. When he turns his attention to the Education Department, what are the chances he'll choose someone who is educationally progressive?

In fact, just such a person is said to be in the running and, perhaps for that very reason, has been singled out for scorn in Washington Post and Chicago Tribune editorials, a New York Times column by David Brooks and a New Republic article, all published almost simultaneously this month. The thrust of the articles, using eerily similar language, is that we must reject the "forces of the status quo" which are "allied with the teachers' unions" and choose someone who represents "serious education reform."

To decode how that last word is being used here, recall its meaning in the context of welfare (under Clinton) or environmental laws (under Reagan and Bush). For Republicans education "reform" typically includes support for vouchers and other forms of privatization. But groups with names like Democrats for Education Reform--along with many mainstream publications--are disconcertingly allied with conservatives in just about every other respect. To be a school "reformer" is to support:

§ A heavy reliance on fill-in-the-bubble standardized tests to evaluate students and schools, generally in place of more authentic forms of assessment;

§ A behaviorist model of motivation in which rewards (notably money) and punishments are used on teachers and students to compel compliance or raise test scores;

§ A corporate sensibility and an economic rationale for schooling, the point being to prepare children to "compete" as future employees; and

§ Charter schools, many run by for-profit companies.

Notice that these features are already pervasive, which means "reform" actually signals more of the same--or, perhaps, intensification of the status quo with variations like one-size-fits-all national curriculum standards or longer school days (or years). Almost never questioned, meanwhile, are the core elements of traditional schooling, such as lectures, worksheets, quizzes, grades, homework, punitive discipline and competition. That would require real reform, which of course is off the table.

Sadly, all but one of the people reportedly being considered for Education secretary are reformers only in this Orwellian sense of the word. The exception is Linda Darling-Hammond, a former teacher, expert on teacher quality and professor of education at Stanford. The favored contenders include assorted governors and two corporate-style school chiefs: Arne Duncan, whose all-too-apt title is "chief executive officer" of Chicago Public Schools, and his counterpart in New York City, former CEO and high-powered lawyer Joel Klein.

Duncan, a basketball buddy of Obama's, has been called a "budding hero in the education business" by Bush's former Education secretary, Rod Paige. Just as the test-crazy nightmare of Paige's Houston served as a national model (when it should have been a cautionary tale) in 2001, so Duncan would bring to Washington an agenda based on Renaissance 2010, which Chicago education activist Michael Klonsky describes as a blend of "more standardized testing, closing neighborhood schools, militarization, and the privatization of school management."

Duncan's philosophy is shared by Klein, who is despised by educators and parents in his district perhaps more than any superintendent in the nation [see Lynnell Hancock, "School's Out," July 9, 2007]. In a survey of 62,000 New York City teachers this past summer, roughly 80 percent disapproved of his approach. Indeed, talk of his candidacy has prompted three separate anti-Klein petitions that rapidly collected thousands of signatures. One, at StopJoelKlein.org, describes his administration as "a public relations exercise camouflaging the systematic elimination of parental involvement; an obsessively test-driven culture; a growing atmosphere of fear, disillusionment, and intimidation experienced by professionals; and a flagrant manipulation of school data." (The only petition I know of to promote an Education secretary candidate is one for Darling-Hammond, at www.petitiononline.com/DHammond/petition.html.)

Duncan and Klein pride themselves on new programs that pay students for higher grades or scores. Both champion the practice of forcing low-scoring students to repeat a grade--a strategy that research overwhelmingly finds counterproductive. Coincidentally, Darling-Hammond wrote in 2001 about just such campaigns against "social promotion" in New York and Chicago, pointing out that politicians keep trotting out the same failed get-tough strategies "with no sense of irony or institutional memory." In that same essay, she also showed how earlier experiments with high-stakes testing have mostly served to increase the dropout rate.

Duncan and Klein, along with virulently antiprogressive DC schools chancellor Michelle Rhee, are celebrated by politicians and pundits. Darling-Hammond, meanwhile, tends to be the choice of people who understand how children learn. Consider her wry comment that introduces this article: it's impossible to imagine a comparable insight coming from any of the spreadsheet-oriented, pump-up-the-scores "reformers" (or, for that matter, from any previous Education secretary). Darling-Hammond knows how all the talk of "rigor" and "raising the bar" has produced sterile, scripted curriculums that have been imposed disproportionately on children of color. Her viewpoint is that of an educator, not a corporate manager.

Tuesday, December 09, 2008

This bill, beginning on and after July 1, 2008, would impose a 6% severance tax on oil extracted from the ground or water in California and use the proceeds to mitigate teacher layoffs that would result from the Governor's cuts to K-14 education. The oil severance tax will not apply to federal oil production, nor will it apply to "stripper wells" if the price of oil falls below $50 per barrel.

• California is the only oil-producing state that does not tax oil that is owned, leased, or extracted from private lands in this state. In contrast, Alabama, Alaska, Colorado, Florida, Idaho, Kansas, Louisiana, Michigan, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming levy a severance oil tax at the rates ranging from 2% to 15%, in addition to other taxes imposed by those states on oil producers or purchasers.

• The oil severance tax will be required to be paid by a producer of oil that is generally defined as any person that extracts oil from the ground or water, owns or manages an oil well, or owns a royalty interest in oil in California.

• The oil severance tax will not apply to oil wells that produce less than 10 barrels of oil per day (so-called 'stripper wells'), unless the price of oil at the well head was more than $50 per barrel.

• The revenue raised from the imposition of the severance oil tax will be used exclusively to fund K-12 education to mitigate teacher layoffs that would result from the Governor's proposed budget cuts.

• The petroleum industry has experienced enormous increases in profits in recent years. In light of the recent increases in the price of oil, a severance tax is reasonable, logical, and could provide needed funds to offset the cuts to education currently proposed by the Governor.

• The imposition of this tax will have no material impact on investments, production, or prices of oil in California because high demand for oil will continue to make the petroleum industry one of the most profitable in the world.

• The oil severance tax law will not create an additional financial burden for consumers because it prohibits the producers or purchasers of oil to gouge consumers by using the tax as a pretext to materially raise the price of oil, gasoline, or diesel fuel.

• Revenue estimate: o The 6% severance tax levied beginning July 1, 2008 will raise about $970 million in 2008-09 and $960 in 2009-10. The estimates assume about 190 million barrels of annual production subject to the tax, and an average price about $85 per barrel (California crude oil is heavier and less expensive than oil used in key price benchmarks.) o The measure could also result in unknown reductions in local property taxes and state tideland revenues, ranging up to the low tens of millions annually.

Controller John Chiang Calls For Immediate Action to Avoid Economic CatastropheStatement by Controller John Chiang at the Senate and Assembly Joint Convention December 8, 2008

Mr. Pro Tem, Madame Speaker, and distinguished members of the Legislature, let me first commend you for convening this joint session to address the dire financial circumstance that threatens the current and future solvency of our state.

Make no mistake, a delay in action would be catastrophic. As unpalatable as tax increases or further program cuts may appear, neither is as toxic to the State’s fiscal health as doing nothing.

Failure to act threatens our ability to respond to natural disasters, our ability to provide life preserving care to the elderly and the ill, and our ability to protect our communities from crime.

If we are to avert sure disaster, together we must set aside blame, proceed with speed, pursue practical solutions, and, most importantly, summon the political courage to make the decisions necessary to protect the programs and services that Californians depend on every day.

Before I speak to the State’s cash flow problem, and why attacking the $28 billion deficit is needed to stave off an immediate shut down of public services, let me begin with a critical distinction between “budgeting” and “cash available.”

As you know, the “budget” refers to the financial plan based on estimated revenues and disbursements for a fiscal year. This plan and its projections are a primary responsibility of the Department of Finance.Read the entire presentation at www.Californiaprogressreport.com

Sunday, December 07, 2008

Now we have David Brooks of the NYT weighing in. You see it is the educational establishment that is the problem, according to Brooks. The problem is that those of us who are protesting Klein have been opposed to and opposed by the educational establishment all along. Be certain to read the other posts on this topic below.

December 5, 2008OP-ED COLUMNISTWho Will He Choose?

By DAVID BROOKSAs in many other areas, the biggest education debates are happening within the Democratic Party. On the one hand, there are the reformers like Joel Klein and Michelle Rhee, who support merit pay for good teachers, charter schools and tough accountability standards. On the other hand, there are the teachers’ unions and the members of the Ed School establishment, who emphasize greater funding, smaller class sizes and superficial reforms.

During the presidential race, Barack Obama straddled the two camps. One campaign adviser, John Schnur, represented the reform view in the internal discussions. Another, Linda Darling-Hammond, was more likely to represent the establishment view. Their disagreements were collegial (this is Obamaland after all), but substantive.

In public, Obama shifted nimbly from camp to camp while education experts studied his intonations with the intensity of Kremlinologists. Sometimes, he flirted with the union positions. At other times, he practiced dog-whistle politics, sending out reassuring signals that only the reformers could hear.

Each camp was secretly convinced that at the end of the day, Obama would come down on their side. The reformers were cheered when Obama praised a Denver performance pay initiative. The unions could take succor from the fact that though Obama would occasionally talk about merit pay, none of his actual proposals contradicted their positions.

Obama never had to pick a side. That is, until now. There is only one education secretary, and if you hang around these circles, the air is thick with speculation, anticipation, anxiety, hope and misinformation. Every day, new rumors are circulated and new front-runners declared. It’s kind of like being in a Trollope novel as Lord So-and-So figures out to whom he’s going to propose.

You can measure the anxiety in the reformist camp by the level of nervous phone chatter each morning. Weeks ago, Obama announced that Darling-Hammond would lead his transition team and reformist cellphones around the country lit up. Darling-Hammond, a professor at Stanford, is a sharp critic of Teach for America and promotes weaker reforms.

Anxieties cooled, but then one morning a few weeks ago, I got a flurry of phone calls from reform leaders nervous that Obama was about to side against them. I interviewed people in the president-elect’s inner circle and was reassured that the reformers had nothing to worry about. Obama had not gone native.

Obama’s aides point to his long record on merit pay, his sympathy for charter schools and his tendency to highlight his commitment to serious education reform.

But the union lobbying efforts are relentless and in the past week prospects for a reforming education secretary are thought to have dimmed. The candidates before Obama apparently include: Joel Klein, the highly successful New York chancellor who has, nonetheless, been blackballed by the unions; Arne Duncan, the reforming Chicago head who is less controversial; Darling-Hammond herself; and some former governor to be named later, with Darling-Hammond as the deputy secretary.

In some sense, the final option would be the biggest setback for reform. Education is one of those areas where implementation and the details are more important than grand pronouncements. If the deputies and assistants in the secretary’s office are not true reformers, nothing will get done.

The stakes are huge. For the first time in decades, there is real momentum for reform. It’s not only Rhee and Klein — the celebrities — but also superintendents in cities across America who are getting better teachers into the classrooms and producing measurable results. There is an unprecedented political coalition building, among liberals as well as conservatives, for radical reform.

No Child Left Behind is about to be reauthorized. Everyone has reservations about that law, but it is the glaring spotlight that reveals and pierces the complacency at mediocre schools. If accountability standards are watered down, as the establishment wants, then real reform will fade.

This will be a tough call for Obama, because it will mean offending people, but he can either galvanize the cause of reform or demoralize it. It’ll be one of the biggest choices of his presidency.

Many of the reformist hopes now hang on Obama’s friend, Arne Duncan. In Chicago, he’s a successful reformer who has produced impressive results in a huge and historically troubled system. He has the political skills necessary to build a coalition on behalf of No Child Left Behind reauthorization. Because he is close to both Obamas, he will ensure that education doesn’t fall, as it usually does, into the ranks of the second-tier issues.

If Obama picks a reformer like Duncan, Klein or one of the others, he will be picking a fight with the status quo. But there’s never been a better time to have that fight than right now.David Brooks

Over at Huffington Post Steve Hilderbrand has argued that progressives should lighten up and stop criticizing Barack Obama for the centrist appointments he has been making. I, and 232 people have responded and I encourage you to do so also.I am concerned particularly of the appointments to his economic team. On Dec. 1, Dean Baker said the following on Truthout.“Fortunes will be made or lost depending on how this bailout money is used. For example, Secretary Paulson just agreed to lend another $20 billion of the Treasury's bailout money to Citigroup. In addition, the Federal Reserve Board agreed to guarantee up to $300 billion of presumably bad assets. This is an enormously valuable guarantee. If Citigroup had to arrange a comparable guarantee in the private market, it would almost certainly pay more than $30 billion a year. This decision sent Citigroup's stock soaring. In the week since the bailout was announced, Citigroup's stock more than doubled, adding more than $25 billion to the company's capitalization. (The government could have bought the bank outright with the money it lent to Citi.) This is great news for Citigroup's shareholders, who would be holding almost worthless stock if Mr. Paulson had not been so generous. Paulson's decision was also good news for Robert Rubin and other top executives at Citigroup. If the government had not stepped in, Citigroup would almost certainly be in bankruptcy and most of its highly paid executives would likely be out on the street.”

William Grieder in a Nation post below explained the connections between Citigroup and the new Obama appointees.

“Events have confronted Obama with a fearful symmetry between past and present, illustrated by his choice of economic advisers. On Friday, we learned that Timothy Geithner, president of the New York Federal Reserve, would become his new treasury secretary and Larry Summers, who held the same position in the Clinton administration, would be the White House overseer of economic policy. On Monday, Geithner was busy executing the government's massive rescue of Citicorp--the very banking behemoth that Geithner and Summers helped to create back in the Clinton years, along with Federal Reserve chairman Alan Greenspan and Robert Rubin, Clinton's economics guru. Now Rubin is himself a Citicorp executive and his bank is now being saved by his old protégé (Geithner) with the taxpayers' money.The connections go way beyond irony. They raise very serious questions about where the new president intends to lead and whether he has the nerve to break from the weak and haphazard strategy of the Bush administration. It has dumped piles of public money on the largest financial institutions and demanded little or nothing in return, hoping for the best. Geithner has been a central player in the deal-making, from Bear Stearns to AIG to Citi. The strategy has not only failed, it has arguably made things worse as savvy market players saw through the contradictions and rushed out to dump more bank stocks.On Wall Street, Geithner is known as a highly competent technocrat, well versed in the financial complexities. But he has also been seen as a weak and compliant regulator of Wall Street firms, someone who did not seem the storm coming. Occasionally, Geithner would anguish publicly about the accumulating time bombs like credit derivatives and urge bankers to do something, but he did not use his supervisory powers to compel action. In bailout negotiations with Wall Street titans, Geithner and the Federal Reserve were spun around like a top more than once.”

So, we are being asked to trust Barack Obama that appointing Geithner and Larry Summers is not a capitulation.I think that the titans of Wall Street, including Robert Rubin and others should be arrested and prosecuted for looting the U.S. treasury and the pensions of millions of our citizens. Putting Rubin’s close allies in charge of U.S. economic policy is deeply disturbing. It means that the Obama administration is taking the reins during the Bush recession, but he is not breaking with the people who caused the problems.

Persons who read this blog know that I worked long and hard for Barack Obama. These economic appointments are deeply disappointing. To me they are endangering the new administration by linking it with the Casino Capitalism of the past.